OUTLOOK ’13: More Europe VAM contracts to be priced monthly

04 January 2013 15:00[Source: ICIS news]

By Sam Weatherlake

LONDON (ICIS)--Participants in the European acetyls markets have been reluctant to look too far into 2013, explaining that much depends on macroeconomic developments that cannot be predicted with any confidence. The only certainty at the end of 2012 was that contract pricing terms for acetic acid and vinyl acetate monomer (VAM) are becoming shorter.

The past year has seen unprecedented volatility in upstream costs for VAM, with the ethylene contract falling by €120/tonne ($156/tonne) in June and a record €170/tonne in July, only to rise by €140/tonne in August and by a further €125/tonne in September.

The impact was seen clearly on VAM, with monthly contract prices falling by €60/tonne in July and rising by €35-45/tonne in September.

The quarterly contract pricing system had been losing popularity even before 2012, particularly among VAM producers, and monthly contract price assessments for both acetic acid and VAM were introduced by ICIS in March 2012.

While increased upstream price volatility was not welcomed by either side of the market, VAM producers were absorbing the greatest impact, as they could not pass the cost changes onto buyers until the end of the quarter.

Some buyers also expressed dissatisfaction with a system that did not allow for the majority of contracts to be negotiated until the final month of the quarter. In some cases, prices were not concluded until early in the following quarter.

The extreme volatility recorded for ethylene prices during the summer of 2012 encouraged a significant number of market participants to move from quarterly to monthly contract pricing, effective either from the fourth quarter of 2012 or from the beginning of 2013.

In contrast to the retroactively priced quarterly contracts, monthly prices are usually settled in the first week of the month, or even in the last week of the preceding month.

Relative stability in the acetic acid market in 2012 has meant that market participants have shown less interest in moving their business to monthly contracts.

Quarterly pricing therefore remains the industry standard for acetic acid contracts in Europe, although some contracts have moved to monthly pricing.

Looking ahead, there was little consensus on probable market movement in 2013, but the importance of macroeconomic sentiment in Europe was widely acknowledged.

A producer noted that restocking activity will drive up demand for acetyls in January, but accepted that underlying sentiment is weak.

The producer said it expected the first half of 2013 to be broadly similar to the second half of 2012, after which supply and demand would be determined by developments in the wider economy.

A reseller suggested that production problems in upstream methanol could tighten acetic acid availability in the first quarter of 2013, which might exert upward pressure on prices.

In contrast, a buyer said that the well-supplied market in December meant that there was potential for further price decreases in January. Another buyer concurred, saying it expected January to be a bleak month.

A VAM reseller said it hoped to take advantage of buyers’ need to replenish their inventories in January to reverse any December price decreases.

A buyer said its outlook for January is not too bad, but noted that demand for VAM in December was lower than in the same month of 2011, and emphasised that its margins are very thin.

The buyer also observed that there is a lot of competition on the export markets for derivative products owing to lower feedstock ethylene costs in other regions.

Consequently, the buyer explained, it would have no choice but to press for lower VAM prices in early 2013.